On Wednesday, Wall Street seemed to believe that the Federal Reserve had raised interest rates at just the right time. On Friday, that faith crumbled.
Stocks took a tumble on Friday, with the Dow Jones Industrial Average falling 367 points. That followed a nearly 250-point drop on Thursday. It was the worst two-day market fall in more than three months.
Several weak economic indicators warned of potential problems for the economy just as the Fed decided to lift interest rates off of zero for the first time in seven years. The PMI manufacturing and service indices both came in weaker than expected. Also, stocks tied to the economy appeared to be falling faster than the rest of the market. The Dow Jones Transportation index, for instance, was down nearly 4% in the past two days.
“The bear case for the market is that economic growth is slow, earnings growth is negative, and rates are now rising,” says James Bianco, who runs his own market research firm. “The bull case is that one of those things turn around, but I don’t know how.”
The biggest concern seemed to be focused on oil, which dropped below $35 a barrel on Friday morning for the second time this week. Although lower oil prices should be good news for consumers and the economy, right now investors are looking at oil as barometer for the health of the world economy.
What’s more, low oil prices have put pressure on energy companies and have raised concerns about the high yield debt market. Energy companies make up about 15% of the so-called junk bond market. Investors began to flee bond funds earlier in the week. Bank of America Merrill Lynch on Friday said that investors had pulled $7.8 billion from bond funds and ETFs for the week. That was up from $4.4 billion the week before.
Higher interest rates typically slow the economy and are bad for the stock market. But on Wednesday, the Fed’s interest rate hike seemed to give the market a boost in confidence. It didn’t hold. Interest rates on long-term government bonds fell on Friday, suggesting that investors were looking for a safe haven.
“People were looking for a Santa Claus [stock market] rally,” says Michael Antonelli, an equity sales trader at Robert Baird. “But it hasn’t materialized and so investors are deciding not to stick around.”